Transfer Pricing post BEPS: Automate or Die!

October 28 2015
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October 5 was BEPS day. The OECD published the long-awaited final versions of all its deliverables on the project against Base Erosion and Profit Shifting. Key deliverables of critical importance to transfer pricing (TP) are the revised chapters V and VI of the OECD Transfer Pricing Guidelines on TP documentation and intangibles, together with related guidance on “Aligning TP Outcomes with Value Creation”.

In short, BEPS significantly increases the TP compliance burden for large corporates by introducing a formal three-tier documentation standard (Master File, Entity File, Country-by-Country Report), and via explicit guidance that corporates will be expected to undertake more comprehensive and detailed TP analysis. For example, the new prescriptive functional analysis standards for intangibles, requires up to 11 features to be mapped for each type of intangible.

In short, a double whammy! More compliance documents will be required and a deeper level of content is expected.

10,000 TP Records: 

Consider the following simple case. A corporate operates in 50 countries and has a total of 100 legal entities. For each entity, assume a modest 10 TP related documents need to be kept on file per year (e.g. entity documentation for the tax year, master file documentation, inter-company agreements, benchmarks, valuation reports for assets transfers, royalty calculations, risk assessment or various communication etc.). Ignore completely that these documents may exist in various formats (e.g. PDF, Excel, Word etc.) or that various draft and final versions may need to be archived. Now assume that these 10 documents need to be kept for a period of 10 years. Across the group 10,000 relevant TP documents need to be maintained. Adjust the parameters only slightly and the task of controlling, storing, sharing, and analysing your global TP records becomes very challenging. Not an easy landscape to navigate.

TP Production Software:

Many corporates have already made a strategic decision to leverage technology in the area of transfer pricing to streamline control and/or automate production. In many cases simply because hiring extra professionals is not really an option in dealing with an increased compliance burden. The case for technology to streamline the control and management of your TP data is compelling. However, for TP documentation production, the question is: how much and what can be automated while maintaining acceptable quality standards for TP documentation that can withstand some degree of TP audits?

Transfer pricing production software has been around for many years, but corporates have had very mixed experiences. In general, the sales pitch has “over promised” and “under-delivered”, producing documentation of very limited value that took longer to produce than would have been the case using MS Word. Whilst, renewed focus in this field may herald a generation of sharper, more useful tools, complex “end-to-end” high-quality TP documentation will never be produced in an automated template based format that can be self-administered by corporates. TP documentation software is not the same as a word processor with full freedom for the user to edit an polish a document.

TP Controller:

Otico Software recently launched TP Controller, which is designed to save users significant time by streamlining the control and management of TP data and automating repetitive documentation tasks to produce content for TP documentation where that makes sense. TP Controller streamlines tasks such as structured filing of TP related documents, benchmarks management, risk management, and stakeholder reporting on TP compliance status and risk assessment. At the same time, TP Controller links relevant documents to support compliance and risk positions as well as allowing instant verification of the existence of such documents. This make the regular reporting to the Board easy and the discussions with your external auditor shorter.

TP Controller also automates the preparation of the Country-by-Country Report and selected content for the Master File and the Entity Files in file formats that can be edited by the user.

This software is part of a new generation of tax technology in the form of stand-alone applications with a focus on user-friendly interfaces, significant time savings, limited implementation and low thresholds for stepping in and out. Such technology is typically focused on automating processes where significant time and cost savings can be achieved and are designed with respect for the fact that creativity and tailor-made solutions cannot be automated without significant loss of quality.

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